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Aviva PLC is the world's fifth largest insurance company and largest insurance provider in the UK as of 2010.[1][2] Its main products and services focus on the long-term insurance and savings business, general and health insurance, and fund management.[2]

As a large insurance group, Aviva PLC is easily affected by natural and manmade disasters, which can cause insurance claims to increase at a cost to Aviva. With above average weather-related losses in the past three years, Aviva’s expenses have increased due to higher property/casualty claims. At the same time, government policy regulating the insurance industry has also affected Aviva. In particular, the UK government's 2009 promotion of price transparency in the insurance industry increased long-term insurance sales for Aviva. In turn, this has offset its increased expenses.[3]

Although it already sells products and services in 28 countries, Aviva still has many plans for expansion. Aviva acquired River Road Asset Management in January 2010 in order to support the expansion of Aviva Investors.[4] In March 2010, Aviva entered the Indonesianlife insurance market with its acquisition of a 60% stake in PT Asuransi Winterthur Life Indonesia. [5] In April 2010, Aviva re-entered Singapore's general insurance industry by becoming Singapore's first direct online car insurer, with a home and travel offering to follow.[6]

Aviva also seeks increased financial flexibility in addition to its acquisitions. As a result, Aviva PLC sold its Australian life and pension business and wealth management platform to National Australia Bank for £443 million on October 1, 2009. On November 3, 2009, Aviva also issued the Initial Public Offering (IPO) of about 42% of Aviva Europe’s Delta Lloyd N.V. branch, which raised £899 million. These transactions will allow Aviva to focus on key growth markets in Asia and to explore balance sheet restructuring possibilities.[7]

Company Overview

The company was formed from a merger of CGU plc and Norwich Union plc on May 30, 2000. Aviva PLC is divided into four geographic regions and is separated into six operating segments: Aviva Europe, Delta Lloyd, UK Life, UK General Insurance, North America, and Asia Pacific.[2] Aviva PLC primarily generates money by selling insurance products but also invests in funds through its prominent Aviva Investors branch. Aviva's strategy focuses on managing a composite portfolio of life and pensions, general insurance, health insurance and asset management products.

Due to the unification of four geographic regions under one Aviva brand, Aviva is able to provide greater financial stability and flexibility to its consumers through the diversification of its products and a multi-channel distribution approach in terms of product, country, and customer group. Its strategic priorities involve building a global asset management business for optimal investment performance, increasing customer reach, allocating capital rigorously, and increasing productivity.[8] In January 2010, Aviva won the Financial Services category at the 2009 Market Research Society Awards for its research techniques that focused on consumer views on the current economic climate as well as consumers' long term needs and attitudes towards the insurance industry.[9] Aviva is also one of the leading providers of life and pension products in Europe and it is continuously expanding its long-term savings businesses in its Asia Pacific and North America regions.

Business Segments

Long term insurance and savings (66.2% of revenue)

The long-term insurance and savings business includes pensions, annuities, general protection, bonds and savings, and other products like equity release and structured settlements. In the UK, Aviva has a 10% share of the long-term insurance and savings market based on annual premium equivalent (APE), or the total of new annual premiums plus 10% of single premiums.[8]

General and health insurance (33.7% of revenue)

In 2009, Aviva reported net written premiums of £9.20 billion for general and health Insurance. Its general insurance business concentrates on personal lines and commercial lines insurance through the provision of motor, household, travel, creditor, commercial liability and commercial property coverage. Its health insurance business concentrates on private health insurance, income protection and personal accident insurance, as well as a range of corporate healthcare products.[8]

Fund Management (1.1% of revenue)

The main brand for fund management is Aviva Investors. Aviva Investors manages the funds of Aviva’s insurance and savings operations, provides investment management for institutional pension funds, and develops and sells retail investment products. Aviva Investors is also ranked twenty-fourth globally and third in the UK by assets under management.[11][8]

Business and Financial Metrics

Q1 FY2010 Summary

Aviva reported revenues of £9.13 billion for the first quarter, which was higher than analysts' estimates of £8.45 billion in revenue. However, worldwide total sales for quarter 1 2010 of £12.64 billion decreased 1% from the sales of quarter 1 2009 of £12.78 billion.[12] The worldwide total sales also rose 16% in quarter 1 2010 from quarter 4 2009, when Aviva generated sales of £10.90 billion.[13]

Its combined operating ratio was negatively affected by bad weather, especially in Europe, during the first quarter, when increased damages claims increased Aviva's expenses. Aviva benefited from a milder winter in Canada but it estimated the total cost of bad weather as £50 million for the quarter. UK life insurance sales increased 14% and its investment sales increased 143% from the fourth quarter of 2009. This was due to an increase in the minimum retirement age, a general savings revival due to the improving economy, and lower interest rates that have encouraged consumers to put more savings into pensions and mutual funds.[12][14] In the US, general insurance sales decreased 48% from the sales of first quarter of 2010 due to Aviva's focus on a larger profit instead of a larger sales volume.[15]

FY2009 Annual Summary

Aviva posted £62.86 billion in total revenue, which rose 248% in 2009 from 2008. Aviva also announced sales of £45.07 billion, which decreased 12% in 2009 from the £51.38 billion sales of 2008. All of Aviva's regions had decreased sales in 2009. However, the decrease in general insurance and health sales in the UK was due to the sale of the Delta Lloyd health business on January 1, 2009. Asia Pacific’s decrease in sales was due to the sale of the Australian business on October 1, 2009.

Aviva also posted net income of £1.81 billion in comparison to a loss of £1.30 billion in 2008. This increase was due to the positive investment performance in 2009 due to Aviva's increased use of hedging to protect its equity portfolio, its diversified management portfolio, and improving economic conditions.[16] This offset the decrease in premiums and sales and the increase in expenses.[17]

FY2008 Annual Summary

Aviva posted revenue of £18.08 billion, which rose 328% in 2008 from 2007. Aviva also announced sales of £51.38 billion, which rose 2% from 2007. This increase was due to growth in Europe and North America in life and pension sales. The company incurred a net loss of £1.30 billion, which was £3.13 billion lower than net income in 2007. This decrease was due to poor investment performance in the economic climate of 2008 and was partially offset by lower expenses and a policyholder tax credit of £1.07 billion.[17]

Trends and Forces

Age demographics can influence demand for Aviva’s different types of products or change pricing models

If a region or country’s demographics lean strongly towards a large proportion of older people, there may be larger demand for pre- and post-retirement insurance, which would affect Aviva’s sales in terms of volume and type. Age demographics can also influence the pricing models for insurance - life Insurance products are more profitable and annuity products return less in countries with low mortality rates. As a result, pricing models need to be adjusted for a country that has growing life expectancy as changing demographics affect claim frequency, medical severity, and indemnity severity.[18] This trend and any mortality assumptions based on age demographics did not significantly affect business in 2007, 2008, or 2009; however, there will be significant changes with the expansion of Aviva's Asia Pacific branch into countries of different age demographics.[3]

Natural and man-made disasters affect the amount of claims Aviva needs to pay out

Natural and man-made disasters are difficult to accurately predict and a large number of such disasters can affect Aviva’s general insurance and health business results depending on the number of claims Aviva needs to pay out. In 2008 and 2009, Aviva's operations in the UK, Ireland, Canada, and France all suffered from weather-related losses. During 2007, there were £475 million worth of claims related to natural disasters in the UK, many due to a series of destructive summer floods and winter storms.[19]

Aviva is protected in terms of exposure to large disasters, however, through its emphasis on personal lines business and small to medium sized commercial risks for its general insurance business. In addition, its maximum exposure is limited to no more than approximately £335 million for a one in ten year event or £620 million for a one in hundred year event. In this way, Aviva will not usually incur significant losses in the face of large natural or man-made disasters.[3] In April, Aviva also unveiled new technology for predicting floods which will simulate which areas are likely to be flooded over the next 200 years. In this way, Aviva will be able to assess the risk factor for individual properties and offer customers fairer prices on home insurance, which will then eliminate excesses in its home insurance prices and minimize costs.[20]

Government policy and legislation causes consumers to view products favorably or negatively

In 2010, the UK government reviewed numerous long-term insurance and savings businesses in order to simplify and reduce the cost of product offerings.[21] In turn, this promoted the purchase of long-term insurance and saving as consumers were exposed to more price transparency. In 2006, the Financial Services Authority in the UK revised rules dealing with nonprofit life reserves. In 2008, the level of charges paid by unit linked policyholders across the life insurance industry was investigated in Netherlands. The policyholders of Aviva’s Delta Lloyd life business were overcharged under the new policy of 2008, adding £126 million to Aviva's 2008 revenue.[3]

Competition

In order to remain competitive in the UK market, Aviva seeks to improve the quality of its products in order to attract more consumers. In particular, Aviva improved its offerings in 2010 - it has reduced prices for its motor trade offering while also making it more flexible, with the removal of the usual mandatory fee of insuring all business premises.[22] It has also improved its group risk and commercial combined offerings to include more automatic cover of standard risks, such as virus attacks in the technology sector. [23][24] It revised its professional office policy by including more benefits such as the inclusion of certain business interruption features as standard.[25]

Allianz (PINK: AZSEY): Allianz is one of the largest financial services providers in the world and its main focus is insurance, asset management, and banking.[28] Like Aviva, Allianz also offers products in property-casualty and life/health insurance. In 2009, its revenue was €97.39 billion and its net income was €4.30 billion.[29]

AXA (AXA): AXA also focuses on a global approach as a general/life/health insurance provider - it has operations concentrated in Europe, North America, and Asia Pacific. It also has operations in investment management.[30] Its revenue was €90.10 billion and its net income was €3.50 billion in 2009.[31]

Zurich Finl SVCS N (VTX:ZURN): Zurich Financial Services is split into 3 segments: General Insurance, Global Life, and Farmers. All three segments provide insurance products, depending on the needs of each consumer. Such products include insurance for individuals, small and medium-sized businesses, commercial enterprises and major multinational corporations[32]. Its revenue was $70.27 billion dollars (€50.40 billion) and its net income was $3.22 billion dollars (€2.50 billion) in 2009.[33]